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#Post#: 62--------------------------------------------------
Dollar Slips Marginally, Dollar-Bloc Remains Heavy, Market Await
s Fresh Push
By: fxvictory Date: September 22, 2014, 10:46 pm
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[move]Dollar Slips Marginally, Dollar-Bloc Remains Heavy, Market
Awaits Fresh Push[/move]
Fresh dollar positive developments have not materialized.
Moody's did not downgrade France before the weekend. ECB's Visco
played down the need for additional stimulus after last week's
disappointing TLTRO. Iwata, formerly at the BOJ, cautioned
against continued yen declines, suggesting that the JPY90-JPY100
range reflects fundamentals.
The dollar's pullback has been quite modest, and it remains well
within the ranges seen before the weekend. The divergence
between the US and UK on one hand, who are expected to raise
rates next year, and the eurozone and Japan, on the other, which
are easing and may ease further, remains a dollar bullish story.
US yields have also eased in recent sessions. The 10-year yield
is trading near 2.56%, down 8 bp from the recent high, and near
a five-day low. European bonds have also rallied, and spreads
have narrowed against Germany. This is especially true of Italy
and Spain.
In a weekend interview, Bundesbank's Weidmann left no doubt that
he opposed the ECB's recent decision to cut interest rates and
introduced an asset-backed securities purchase program. Weidmann
argued that it posed moral hazard for banks. Being able to sell
ABS to the ECB allowed banks to transfer risk from themselves to
taxpayers. This is the point that most observers stress, but
Weidmann's critique is broader.
Weidmann argues that this is exactly the opposite direction that
officials have agreed to move. He argues it is bad politics in
that it takes pressure of government's to implement structural
reforms. If the ECB would stop trying to "rescue" EMU, the
governments, especially in France and Italy, would be more
incentivized to enact the reforms that create the conditions for
growth and stability.
Therein lies the rub. ECB words and deeds have helped push down
interest rates to incredibly low levels. This eases the debt
servicing burden, and in turn, allows the issue of structural
reforms to be demoted to only important, and no longer urgent.
Yet, if Draghi and the ECB did not do anything, the existential
issues, like the sustainability of EMU itself, would overwhelm
policy makers and investors.
The euro's recovery from the last pre-weekend sell-off faltered
in near $1.2870. A move above $1.2910 would likely squeeze some
of the late shorts, many of whom are looking for $1.2750 as the
next downside target.
Sterling was hit by a classical "buy the rumor sell the fact"
type of activity after the Scottish referendum. Speculators
bought into sterling's decline toward $1.60 and had driven
sterling up four cents off its lows ahead of the results. There
was not follow through selling in Asia or Europe after the
horrific price action before the weekend. $1.6400 offers initial
resistance. It may take some upward pressure on UK rates to
strengthen the bulls' conviction.
In recent days, there have been a number of voices that have
begun cautioning about continued yen weakness. This reinforces
our sense that the JPY110 represents what could be the top of
the new range for dollar-yen. First, the junior coalition
partner in the LDP-led government, the New Komeito suggested
last week that excessive yen weakness needed to be avoided.
Second, there was a news wire survey that found many Japanese
corporations do not see a weaker yen as helpful. Third, were
comments earlier today by Iwata, formerly of the BOJ, cautioning
against a yen over-shoot to the downside.
These are not the usual voices that would be heard if there were
some caution as a preemptive move ahead of the US Treasury's
next report on the international economy and foreign exchange
market. The report is expected next month. Much to the surprise
of economists and much to the chagrin of Japanese officials, the
weaker yen has not spurred much of a rise in Japanese exports.
This may help temper a more strident reaction by Japan's trading
partners. Nor is Europe really in a position to push back, as
ECB and French officials have been explicitly taking the yen
lower.
The dollar-bloc remains heavy. The Australian dollar is said to
have been dragged lower by concerns about China ahead of the
release of the flash HSBC manufacturing PMI first thing tomorrow
in Beijing. In addition, there have been press reports
highlighting the possibility that macro-prudential measures are
used to rein in the housing market. The Australian dollar is
making new lows for the move and is approaching a target near
$0.8850.
The Australian dollar is the weakest currency today, losing
about 0.65%. The New Zealand dollar is down half as much and is
the second weakest of the majors. Prime Minister Key won an
absolute majority in parliament, but it does not impact
sentiment much. It is barely holding above last week's lows near
$0.8080. The Canadian dollar is third weakest of the majors,
slipping about 0.25%. The Bank of Canada's Poloz pressed his
point that the uptick in inflation is temporary, and the excess
capacity will still take several quarters to absorb.
The US reports August existing home sales, which have been on a
rising trend since the end of Q1. However, the focus will be on
Draghi's speech to the EU Parliament committee in Brussels. His
comments in light of the poor TLTRO launch will be important. In
the US, given the confusion between the dovish FOMC statement
and the hawkish forecasts, Fed comments are likely to be
scrutinized. NY Fed's Dudley speaks around the same time as
Draghi. Although he is a regional president, we identify Dudley
as part of the signal-generator at the Fed. Kocherlakota also
speaks today. The Minnesota Fed President is a bit more dovish
that the Troika (Yellen, Fischer and Dudley)
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